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When do investment schemes amount to collective investment schemes (CISs) to require the Financial Conduct Authority’s (FCA) authorisation? Michael Wainwright, partner at Dentons, looks at the Court of Appeal’s interpretation of CISs in the case of FCA v Capital Alternatives and the impact of this judgment on commercial ventures.
Financial Conduct Authority v Capital Alternatives Ltd and others  EWCA Civ 284,  All ER (D) 280 (Mar)
The FCA brought an action against the promoters and operators of four investment schemes to establish whether they were collective investment schemes within the meaning of the Financial Service and Markets Act 2000, s 235 (FSMA 2000). The judge held that they were. The operators appealed and the FCA cross-appealed. The Court of Appeal, Civil Division, clarified the meaning of the phrase ‘the property is managed as a whole’ within FSMA 2000, s 235(3)(b) and held that the schemes had been collective investment schemes. Further, the FCA’s cross-appeal was dismissed as it had been open to the judge, in order to understand how the scheme would work, to consider the scheme brochure, which had not formed a part of the contractual arrangements for the scheme.
What is the background to this case?
The defendants operated a number of schemes for investment in farm harvests and carbon credits. This case looked at whether the schemes were being operated and promoted without the required authorisation of the FCA as CISs. The schemes would have been unregulated CISs (UCISs), which can only be promoted to investment professionals and high net-worth and sophisticated investors, and not to the general public. Contravention of the prohibitions on operating or promoting a CIS without FCA authorisation is a criminal offence.
What are the main points of the judgment in relation to the definition of collective investment schemes?
The Court of Appeal has upheld the finding by the High Court that the schemes were CISs. The crucial point was whether either of the conditions in paragraph three of the statutory definition of a CIS were met (see FSMA 2000, s 235(3)). Although the profits were not pooled because each investor was entitled to the profits derived from a particular plot of land, the courts have found that the operator managed the properties as entire projects and, therefore, the schemes were CISs. All the tasks involved in cultivating the land were planned and carried out as a whole, with no intervention by the investors. The only aspect of individual management was the segregation of plots. This was not substantial enough and only had the purpose of evading FCA rules.
How does this judgement impact on commercial ventures?
The defendants argued that this finding would affect other commercial ventures, such as property investment clubs whose operators would be in breach of the statutory prohibitions. Although the Court of Appeal could not discard the potential damaging results of its decision, it offered enough clarity to distinguish the facts in the case from schemes that do not amount to a CIS. The latter includes schemes where the operator carries out the day-to-day management of the properties, such as buy-to-let flats, and it does so on an individual basis for the owner of each property who retains the power to decide over the identity of tenants and the terms of the lease. On the opposite end, a CIS exists where the operator of a scheme makes all decisions and investors do not receive the profit referable to any individual property.
What should lawyers be advising their clients?
This case shows that it is not easy to structure a commercial venture to avoid the CIS definition.
Operators should take care when relying on informal or individual guidance from the FCA. The defendants sought to rely on the FCA’s responses to queries on whether particular kinds of schemes would amount to a CIS. The responses from the FCA were non-committal and stressed that the interpretation of financial regulation is ultimately a matter for the courts. The FCA also warned that a change in facts might alter the view it expressed in those responses. This turned out to be the case—the defendants had stated that the properties would be managed on an individual basis when, in fact, they were managed as a whole.
Interviewed by Stephanie Boyer.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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